I'm the environment editor at Forbes. Before joining Forbes in April 2011, I wrote about all things green and tech as a contributor to The New York Times, a senior editor at Fortune and an assistant managing editor at Business 2.0 magazine. I previously was the business editor at the San Jose Mercury News and during the (first) dot-com era served as a senior writer and senior editor at The Industry Standard (RIP).

Shining A Light On The LED Opportunity

This guest post was written by Tom Pincince, chief executive of Digital Lumens, a Boston-based lighting systems company.

By Tom Pincince

(Photo credit: Wikipedia)

Smart investors know that, often, the biggest growth opportunities are the ones you can’t invest in – yet. New technologies typically have the most potential for growth when they are still under development or in the early phases of market penetration. At that point, fledgling companies have infinite possibility and tremendous risk and need investors who are accustomed to this type of deal. If you have the ability and fortitude to invest in an emerging company at this critical stage, the rewards can be significant.

The creation of new markets is often dependent on component technologies opening up opportunities, rather than the development of entire supply chains of products. This creates interesting supply-demand curves, which has been happening in many areas of clean tech, including in the LED markets.

Established LED players – Cree, Rubicon and others – have successfully built powerhouse businesses around the LED chip itself, investing persistence and cash to bring LEDs to where they are today. Now, LEDs are ready for a broad range of applications and are able to successfully displace conventional lighting technology.

But the risky time to invest in LED chips was 10 years ago when the technology was unproven and high-risk. LED chip makers have grown as the technology has become the de facto standard for displays, indicator lights and has more handsomely rewarding risk-tolerant early investors.

And while some of the LED suppliers have taken heat in the public markets – driven by fear of commoditization and of the impact from China (both from competition and boom-bust incentives), the book is not about to close on the LED story. We are simply getting ready for the next chapter: the downstream opportunity or the ‘second wave’ that integrates LEDs into intelligent systems that deliver light and more.

Where the smart money is going

For LEDs, the push into the general illumination markets is well under way, driven by the energy efficiency and longevity that are impossible to meet with aging lighting technologies. And LEDs’ historically premium prices are rapidly decreasing to more affordable points, opening the worldwide lighting market to this captivating new technology.

Many manufacturers are addressing this market with an evolutionary approach – incorporating LEDs into traditional lighting fixtures and replacement bulb form factors. Others are taking a more revolutionary approach and using the LED chip as an opportunity to rethink the lighting value proposition and leverage LEDs as highly controllable illumination sources that open up new types of applications.

From a broader perspective, the LED market progression is poised to mirror the development of the PC market, where the value was initially in the chip makers (Intel and memory companies), then moved to system makers (Dell, Gateway, IBM PC), and then to the software companies (Microsoft, Netscape, Lotus). Ultimately, there are few long-term winners at each level of the value chain, but each level goes through a massive expansion period that lasts for years before it is dominated by one or two gorillas. We may be well into or through the LED chip phase, with one or two winners. Now, the system and software phase is under way – with a completely open playing field.

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